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In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a settlor, who transfers some or all of his or her property to a trustee. The trustee holds that property for the trust's beneficiaries. Trusts have existed since Roman times and have become one of the most important innovations in property law.[1]
An owner placing property into trust turns over part of his or her bundle of rights to the trustee, separating the property's legal ownership and control from its equitable ownership and benefits. This may be done for tax reasons or to control the property and its benefits if the settlor is absent, incapacitated, or dead. Trusts are frequently created in wills, defining how money and property will be handled for children or other beneficiaries.
The trustee is given legal title to the trust property, but is obligated to act for the good of the beneficiaries. The trustee may be compensated and have expenses reimbursed, but otherwise must turn over all profits from the trust properties. Trustees who violate this fiduciary duty are self-dealing. Courts can reverse self dealing actions, order profits returned, and impose other sanctions.
The trustee may be either an individual, a company, or a public body. There may be a single trustee or multiple co-trustees.
The trust is governed by the terms under which it was created. In most jurisdictions, this requires a contractual trust agreement or deed.
Roman law had a well-developed concept of the trust (fideicommissum) in terms of "testamentary trusts" created by wills but never developed the concept of the inter vivos (living) trusts which apply while the creator lives. This was created by later common law jurisdictions. The waqf is a similar institution in Islamic law, restricted to charitable trusts. Personal trust law developed in England at the time of the Crusades, during the 12th and 13th centuries. In medieval English trust law, the settlor was known as the feoffor to uses while the trustee was known as the feoffee to uses and the beneficiary was known as the cestui que use, or cestui que trust.
At the time, land ownership in England was based on the feudal system. When a landowner left England to fight in the Crusades, he conveyed ownership of his lands in his absence to manage the estate and pay and receive feudal dues, on the understanding that the ownership would be conveyed back on his return. However, Crusaders often encountered refusal to hand over the property upon their return. Unfortunately for the Crusader, English common law did not recognize his claim. As far as the King's courts were concerned, the land belonged to the trustee, who was under no obligation to return it. The Crusader had no legal claim. The disgruntled Crusader would then petition the king, who would refer the matter to his Lord Chancellor. The Lord Chancellor could decide a case according to his conscience. At this time, the principle of equity was born.
The Lord Chancellor would consider it "unconscionable" that the legal owner could go back on his word and deny the claims of the Crusader (the "true" owner). Therefore, he would find in favor of the returning Crusader. Over time, it became known that the Lord Chancellor's court (the Court of Chancery) would continually recognize the claim of a returning Crusader. The legal owner would hold the land for the benefit of the original owner, and would be compelled to convey it back to him when requested. The Crusader was the "beneficiary" and the acquaintance the "trustee". The term "use of land" was coined, and in time developed into what we now know as a trust.
"Antitrust law" emerged in the 19th century when industries created monopolistic trusts by entrusting their shares to a board of trustees in exchange for shares of equal value with dividend rights; these boards could then enforce a monopoly. However, trusts were used in this case because a corporation could not own other companies' stock[2]:447 and thereby become a holding company without a "special act of the legislature".[3] Holding companies were used after the restriction on owning other companies' shares was lifted.[2]:447
The trust is widely considered to be the most innovative contribution of the English legal system.[4] Today, trusts play a significant role in most common law systems, and their success has led some civil law jurisdictions to incorporate trusts into their civil codes. In Curaçao, for example, the trust was enacted into law on 1 January 2012; however, the Curaçao Civil Code only allows express trusts constituted by notarial instrument.[5] France has recently added a similar, Roman-law-based device to its own law with the fiducie,[6] amended in 2009;[7] the fiducie, unlike a trust, is a contractual relationship. Trusts are widely used internationally, especially in countries within the English law sphere of influence, and whilst most civil law jurisdictions do not generally contain the concept of a trust within their legal systems, they do recognise the concept under the Hague Convention on the Law Applicable to Trusts and on their Recognition (partly only the extent that they are parties thereto). The Hague Convention also regulates conflict of trusts.
Although trusts are often associated with intrafamily wealth transfers, they have become very important in American capital markets, particularly through pension funds (essentially always trusts) and mutual funds (often trusts).[2]
Property of any sort may be held in a trust. The uses of trusts are many and varied, for both personal and commercial reasons, and trusts may provide benefits in estate planning, asset protection, and taxes. Living trusts may be created during a person's life (through the drafting of a trust instrument) or after death in a will.
In a relevant sense, a trust can be viewed as a generic form of a corporation where the settlors (investors) are also the beneficiaries. This is particularly evident in the Delaware business trust, which could theoretically, with the language in the "
The greatest and most distinctive achievement performed by Englishmen in the field of jurisprudence is the development from century to century of the trust idea.
Jurisdiction specific:
The taxpayer whose residence has been ‘locked’ into a trust has now been given another opportunity to take advantage of these CGT exemptions. The Taxation Law Amendment Act of 30 Sept. 2009 commenced on 1 Jan. 2010 and granted a 2-year window period from 1 Jan. 2010 to 31 Dec. 2011 affording a natural person the opportunity to take transfer of the residence with advantage of no transfer duty being payable or CGT consequences. Whilst taxpayers can take advantage of this opening of a window of opportunity is not likely that it will ever become available thereafter.[28]
Under South African law living trusts are considered tax payers. Two types of tax apply to living trusts, namely income tax and capital gains tax (CGT). A trust pays income tax at a flat rate of 40% (individuals pay according to income scales, usually less than 20%). The trust's income can, however, be taxed in the hands of either the trust or the beneficiary. A trust pays CGT at the rate of 20% (individuals pay 10%). Trusts do not pay deceased estate tax (although trusts may be required to pay back outstanding loans to a deceased estate, in which the loan amounts are taxable with deceased estate tax).[27]
Until recently, there were tax advantages to living trusts in South Africa, although most of these advantages have been removed. Protection of assets from creditors is a modern advantage. With notable exceptions, assets held by the trust are not owned by the trustees or the beneficiaries, the creditors of trustees or beneficiaries can have no claim against the trust. Under the Insolvency Act (Act 24 of 1936), assets transferred into a living trust remain at risk from external creditors for 6 months if the previous owner of the assets is solvent at the time of transfer, or 24 months if he/she is insolvent at the time of transfer. After 24 months, creditors have no claim against assets in the trust, although they can attempt to attach the loan account, thereby forcing the trust to sell its assets. Assets can be transferred into the living trust by selling it to the trust (through a loan granted to the trust) or donating cash to it (any natural person can donate R100 000 per year without attracting donations tax; 20% donations tax applies to further donations within the same tax year).
There are two types of living trusts in South Africa, namely vested trusts and discretionary trusts. In vested trusts, the benefits of the beneficiaries are set out in the trust deed, whereas in discretionary trusts the trustees have full discretion at all times as to how much and when each beneficiary is to benefit.
In South Africa, minor children cannot inherit assets and in the absence of a trust and assets held in a state institution, the Guardian's Fund, and released to the children in adulthood. Therefore testamentary (will) trusts often leave assets in a trust for the benefit of these minor children.
In South Africa, in addition to the traditional living trusts and will trusts there is a ‘bewind trust’ (inherited from the Roman-Dutch bewind administered by a bewindhebber)[25] in which the beneficiaries own the trust assets while the trustee administers the trust, although this is regarded by modern Dutch law as not actually a trust.[26] Bewind trusts are created as trading vehicles providing trustees with limited liability and certain tax advantages.
In many ways trusts in South Africa operate similarly to other common law countries, although the law of South Africa is actually a hybrid of the British common law system and Roman-Dutch law.
For a living trust, the grantor may retain some level of control to the trust, such by appointment as protector under the trust instrument. Living trusts also, in practical terms, tend to be driven to large extent by tax considerations. If a living trust fails, the property will usually be held for the grantor/settlor on resulting trusts, which in some notable cases, has had catastrophic tax consequences.
Living trusts generally do not shelter assets from the U.S. federal estate tax. Married couples may, however, effectively double the estate tax exemption amount by setting up the trust with a formula clause.[24]
Negative aspects of using a living trust as opposed to a will and probate include upfront legal expenses, the expense of trust administration, and a lack of certain safeguards. The cost of the trust may be 1% of the estate per year versus the one-time lump-sum fee of 1 to 4% for probate, which applies regardless of whether lack of drafted will. Unlike trusts, wills must be signed by two to three witnesses, the number depending on state law. Legal protections which apply to probate and not trusts include provisions which protect the decedent's assets from mismanagement or embezzlement, such as requirements of bonding, insurance, and itemized accountings of probate assets.
Living trusts, as opposed to testamentary (will) trusts, avoid probate.[21] Avoiding probate may save costs and maintain privacy[22] and living trusts have become very popular.[23] The probate courts may charge a fee based on a percentage net worth of the deceased time, and probate records are available to the public while distribution through a trust is private. Both living trusts and wills can also be used to plan for unforeseen circumstances such as incapacity or disability, by giving discretionary powers to the trustee or executor of the will.
In the United States the tax law allows trusts to be taxed as corporations, partnerships, or not at all depending on the circumstances, although trusts may be used for tax avoidance in certain situations.[2]:478 For example, the trust-preferred security is a hybrid (debt and equity) security with favorable tax treatment which is treated as regulatory capital on banks' balance sheets. The Dodd-Frank Wall Street Reform and Consumer Protection Act changed this somewhat by not allowing these assets to be a part of (large) banks' regulatory capital.[20]:23
State law applies to trusts, and the Uniform Trust Code has been enacted by the legislatures in many states. In addition, federal law considerations such as federal taxes administered by the Internal Revenue Service may affect the structure and creation of trusts. The common law of trusts is summarized in the Restatements of the Law, such as the Restatement of Trusts, Third (2003−08).
Trust law in civil law jurisdictions, generally including Continental Europe, typically does not exist, but arises due to conflict of laws. Tax avoidance concerns have historically been one of the reasons that European countries have been reluctant to adopt trusts.[2]
Trusts originated in England, and therefore English trusts law has had a significant influence, particularly among common law legal systems such as the United States and the countries of the Commonwealth.
Trusts go by many different names, depending on the characteristics or the purpose of the trust. Because trusts often have multiple characteristics or purposes, a single trust might accurately be described in several ways. For example, a living trust is often an express trust, which is also a revocable trust, and might include an incentive trust, and so forth.
Common purposes for trusts include:
The beneficiaries are beneficial (or equitable) owners of the trust property. Either immediately or eventually, the beneficiaries will receive income from the trust property, or they will receive the property itself. The extent of a beneficiary's interest depends on the wording of the trust document. One beneficiary may be entitled to income (for example, interest from a bank account), whereas another may be entitled to the entirety of the trust property when he attains the age of twenty-five years. The settlor has much discretion when creating the trust, subject to some limitations imposed by law.
In the United States, the Uniform Trust Code provides for reasonable compensation and reimbursement for trustees subject to review by courts,[12] although trustees may be unpaid. Commercial banks acting as trustees typically charge about 1% of assets under management.[13]
The trustees administer the affairs attendant to the trust. The trust's affairs may include prudently investing the assets of the trust, accounting for and reporting periodically to the beneficiaries, filing required tax returns, and other duties. In some cases dependent upon the trust instrument, the trustees must make discretionary decisions as to whether beneficiaries should receive trust assets for their benefit. A trustee may be held personally liable for problems, although fiduciary liability insurance similar to directors and officers liability insurance can be purchased. For example, a trustee could be liable if assets are not properly invested. However, in the United States, similar to directors and officers, an exculpatory clause may minimize liability; although this was previously held to be against public policy, this position has changed.[11]
A trust may have multiple trustees, and these trustees are the legal owners of the trust's property, but have a fiduciary duty to beneficiaries and various duties, such as a duty of care and a duty to inform.[10] If trustees do not adhere to these duties, they may be removed through a legal action. The trustee may be either a person or a legal entity such as a company, but typically the trust itself is not an entity and any lawsuit must be against the trustees. A trustee has many rights and responsibilities which vary based on the jurisdiction and trust instrument. If a trust lacks a trustee, a court may appoint a trustee.
Generally, a trust requires three certainties, as determined in Knight v Knight:
In some jurisdictions certain types of assets may not be the subject of a trust without a written document.[9]
Typically a trust can be created in the following ways:
Trusts may be created by the expressed intentions of the settlor (express trusts) or they may be created by operation of law known as implied trusts. An implied trust is one created by a court of equity because of acts or situations of the parties. Implied trusts are divided into two categories: resulting and constructive. A resulting trust is implied by the law to work out the presumed intentions of the parties, but it does not take into consideration their expressed intent. A constructive trust is a trust implied by law to work out justice between the parties, regardless of their intentions.
. spendthrift trust through the spendthrifts as well protection of individual [2]securitization", and leading to its use in pensions, mutual funds, and asset bankruptcy remote has been commonly used. One of the most significant aspects of trusts is the ability to partition and shield assets from the trustee, multiple beneficiaries, and their respective creditors (particularly the trustee's creditors), making it "Massachusetts business trust although traditionally the :475–6[2]
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